The Africa Report: With regards to the foreign exchange situation, the rates have converged in the last few months but there is still a risk with the oil prices going below $50 now. What are you doing as a bank to hedge moving forward?

Herbert Wigwe: I am not exposed to people who are taking currency risks so I am perfectly hedged if you like. I don’t have that level of exposure. However, that is not the only point. The point is that if you find yourself in a situation where manufacturing companies cannot find foreign exchange for their raw materials, it is a problem.

Because from the management accounting standpoint, they need to produce, they need to make contribution margins to repay their fixed costs to be able to then pay back their loans. So the idea is that, yes, if you have a currency risk, it is a problem. But you also have a situation if you are overly exposed to people who rely significantly on imported raw materials.

At the last Monetary Policy Committee meeting, the Central Bank of Nigeria observed that credit to the private sector declined considerably and credit to the government is trending above the target. What are the hindrances currently to lending to the private sector?

Two things. Number one, I already mentioned to you, people are going to be extremely careful with these currency issues with respect to companies that have imported raw materials.

Secondly, the conversion cycles for most companies is a lot longer. Let me give you an example. The central bank is using monetary policy to manage price. When you lend, they debit you for foreign exchange and it takes a while and then they release it to you. So even though it’s available, all of those things are putting pressure on the system.

But I guess the most significant is the fact that if the government is issuing Treasury Bills at 18% or 19%, by definition, the after tax yield on all of those things is already in the 20s, about 24% or 23%. Now why do I want to start exposing myself to companies and take the risk and take the liquidity risk as well when the after tax yield is returning at the same level? That is really the issue.

The government is also issuing Treasury Certificates and therefore making people even at the retail level to want to invest in those Treasury Certificates. And by wanting to invest in those Treasury certificates, technically you are crowding out the private sector from lending. So that’s what’s happening.

In the government’s Economic Recovery and Growth Plan, they’ve prioritised certain sectors: agriculture, manufacturing, solid minerals, etc. Looking at your strategy and plans, do these sectors align with your long term plans?

Some of them yes, some of them no. We don’t want to grow our oil and gas book aggressively, certainly. Manufacturing remains important. Particularly to those sectors that rely less on imported raw materials and I’ll give you an example. Cement, for instance, is far less reliant on imported raw materials. And you have a couple of other industries like that.

Agriculture is critical because quite frankly to find our way out of this situation, now and in the future, we must do something about agriculture and this is irrespective of whether the government is going to continue to support it or not. But at least so far they have come up with several schemes that have helped to de-risk the sector to some extent. So we are supporting it.

Some of them have to do with the anchor borrowing program, some of them have to do with the Commercial Agricultural Credit scheme and all of that. Apart from that, we need to actually get into agriculture properly for us to help to diversify the income base of our country, as well as the resource base required to produce finished products. we need to actually get into agriculture properly for us to help to diversify the income base of our country

So yes, agriculture, manufacturing for those who rely less on imported raw materials. I am not into solid minerals because it is not a market I understand too well. Construction is still important. You have some residual Real Estate but it’s not very big. Coming from some of the projects which we have started before the recession.

So all those sectors but with more emphasis on those that use local raw materials, apart from solid minerals. But the focus for us is more around retail. We are using our digital strategy to pursue very aggressive retail growth. To increase our savings accounts and bring down our cost of funds, as well as help to increase the level of financial inclusion in the market. So you will see a lot more focus on the retail side.

On that point, there is increased competition in the retail space. You talked about agriculture as a priority sector. One of the new banks is heavily focused on agriculture. With this increased competition, what are you doing to ensure that you are able to sustain growth?

We have a very strong digital business. I doubt that there’ll be any institution that has a stronger digital business than we do. But the way we’ve chosen to do our business is that we keep our traditional lights on and at the same time follow a Fintech strategy. And the idea is we use digital to pursue retail, we use digital to enhance the processes of our customers.

And all of this is done in a manner to ensure that if there’s any institution that can disrupt the sector, we are at the forefront of it. In terms of our financial innovation, we have a basement structure (internal innovation team) where we basically continuously tap from innovation within the bank. And then of course to make sure that we don’t lose sight of what is happening externally, we have an investment in the African Fintech Foundry, which is part of us.

Through that we basically seek out external opportunities, bring them in, refine them and see if we can use them internally. We have a robust governance framework, if you like, to support all of that, while making sure that our traditional business which provides your bread and butter is ongoing.

Today we are opening about 400,000 accounts on a monthly basis which should lead to about a million accounts by the end of August. We are partnering with the Telcos; it’s a very robust strategy which I doubt that anybody is pursuing. So we are deepening and expanding our retail base to complement our strengths as far as our Wholesale banking is concerned.

On that point of the accounts you are opening, what are the dormancy rates, because it’s one thing to open them and another thing for the accounts to be maintained?

It will take a little while for it to compete because as you move down the ladder in terms of the amount you find per account, it reduces. The point I keep making is that, one, it enhances the overall stability of your balance sheet.

Secondly, if you have an additional 10 million accounts, it provides you about, by the time you provide them card services etc., it enhances your income base by something like N15bn ($41m). And this is without any lending whatsoever. I am talking of irrespective of account types. Even for the current account.

Remember that one of the things we’ve done is that we’ve come up with ways to basically manage those accounts outside of our traditional platforms. So the cost to serve those accounts is lower. The problem would have been if you were using your traditional banking application to support it, then you would run into trouble because the cost of servicing these accounts will be extremely high.

Now when you are doing this and these guys are just using ATM’s, some of them have virtual accounts, they are being served by the contact centre, it’s all about transaction banking, card services, you’ll find that it makes more sense. I lie when I say it’s only N15bn. It could be a lot more. Just providing that service and if done properly based on even an average account balance of N10,000 ($27) it can be significant when you are dealing with the volumes.

2017 is the last year of your current strategic cycle. What trends are you considering as you craft a new strategy?

Technology for us is a big point. Our retail push is a massive focus. Even our org structure has been altered because we now have a digital banking division. The same way you have a commercial banking and corporate banking division and all of that. We have a digital banking division which is basically straddling across to make sure we are using digital to serve our customers because there are evolving trends as far as customer needs are concerned.

Value chains are shifting; in some cases now the customer is looking to take his product to the last mile. He wants to be able to sell his cement to the retail customer, not go through a distributor, for example. So you need to basically do digital to ensure that those things happen.

You also find a situation where in our population, if you look at Nigeria’s demographics, about 60% is below the age of 35. So the changing needs and demands of all of this people, students etc., requires that the products which you provide should be different.

Now it will be telling if started sharing with you some of the strategic things we are doing with all the students and youths we are engaging. Now they may not have significant savings but you are building up a critical mass of people and you are going to be banking them for their entire lifetime. So those are the types of things we are doing.

Looking beyond Nigeria, you have six units and a couple of trade offices. From a trade finance/flows perspective, what are you targeting and is this core to your strategy moving forward?

It is core. We have a bank in London, we may have another bank internationally to continue to support our trade and make sure that we build a strong franchise. London basically provides correspondent banking services not just for Nigeria but for the entire continent and countries in which we have a presence.

We have a strong presence in China by way of a rep office. It’s helping our trade flows because people have a better understanding of Nigeria and Nigerians who are going to China also reach out knowing we are there and we are ready to support them in the entire process. I think for us going forward it’s about creating a global franchise with presence in major markets and of course making sure we run a true world class institution.

Finally, can you predict the future for us in terms of where the bank will end up on key numbers at the end of 2017? And looking at the currency, some analysts are forecasting further devaluation, where will the currency end up?

I don’t know what you mean by further devaluation. I think where we are on the outward limit which is between N350 and N370, any measure you use to determine the value of the naira we would fall well within that range. The critical thing is confidence and we are getting more and more confident that the Central Bank will be able to deliver.

But if you ask me, once we can converge the rates, whether it is downwards or whatever, we will be fine and I don’t think it will be far away from where we are right now. Confidence is being restored. Yes, government needs to do a couple of things on the fiscal side but it will take a bit more time. There will be some changes in monetary policy I think, but 2018 will be a bit more stable and definitely we should be coming out of the recession.

For the bank, you know when you are coming out of a recession different things hit you. We talked about Etisalat earlier, we will get past that. Several of those loans start to become problematic and you see them in different institutions. We must have the best asset quality ratios in the industry. Definitely! But I think quite frankly we will remain within the guidance levels we’ve given.

For non-performing loans ratios well, well within 5%. We had said 3% but I think you may see an uptick slightly above that. I think our return on equity should be north of 20% definitely! So those types of numbers will show. It will reflect the fact that we are coming out of recession but still very strong numbers.